After the Tax Cuts and Job Act of 2017 (TCJA), business owners should consider consulting with a professional tax advisor when it comes to the deductibility of their meals and entertainment expenses. Congress has been skeptical of these types of deductions because business owners have been known to claim expenses for activities that are unrelated to business expenses. Because of this, Congress has now disallowed business owners to claim deductions for most entertainment expenses. The concerns Congress has on business deductions being used incorrectly isn’t completely unjustified, however it has caused confusion on the extent expenses of business-related meals accompanied by entertainment or at an entertainment event. This has caused quite a bit of confusion on what exactly can and cannot be deducted, which is why it is every business owners’ best interest to consult with a professional tax advisor. A tax consultant will use due diligence and their professional judgement when clients claim any deduction related to business meals until further guidance and clarification from the IRS.
Prior to the Tax Cut and Job Act of 2017 business owners didn’t have to worry about recognizing the difference between meals from entertainment at a client outing because they were both eligible to be deducted. Now that entertainment expenses are no longer eligible to be deducted, business owners are left to determine the eligibility of deducting meals that are paid for in correlation with entertainment. For example, meals that have been purchased at a sporting event. While awaiting on clarification from the IRS, the American Institute of Certified Public Accountants (AICPA) has recommended in a letter to the IRS that meals for which the cost is separately charged at an entertainment event, should be eligible to remain 50% deductible. Click Here to view the recommendation letter from the AICPA to the IRS.
Another gray area that required more clarification from the IRS is the deductibility of snacks and other food items provided by employers to their employees. Prior to the TCJA employers were able to fully deduct snacks and other food items provided to their employees at 100%. This has left a lot of confusion and is left up for interpretation until we’re granted further clarification from the IRS because a snack could equate to an employer-provided meal. Therefor it could be limited to just a 50% deduction. Business owners could argue that snacks are a benefit to their employees and qualify as recreational expenses. Sec. 274(e)(4) was left unchanged by the TCJA and stated that recreational expenses are exempt from the 50% deduction that has been assigned to business meals, and therefore would be eligible to be 100% deductible. In additional it has been suggested that snacks provided by employers may not be allowed under the new Sec. 274(o), which states that meals provided in employer operating eating facilities are nondeductible. AICPA has also requested clarification on snacks and beverages that are provided to employees in locations that designated eating facility.
Lastly, another area that is debatable after the TCJA is the deductibility of employer-hosted social activities. These types of activities have been considered beneficial as they boost employee morale and provide networking opportunities, which has been eligible to be fully deducted under Sec. 274(e)(4). This has caused quite of bit of confusion since entertainment expenses has now been eliminated under Sec. 274(a)(1)(A) and whether employer-hosted social activities will be considered non-deductible under the entertainment category. Because of this confusion, the AICPA has also requested clarification on whether these types of activities will remain 100% deductible or if they will be considered non-deductible.
Business owners should consult a professional tax advisor when it comes to meal deductions to make sure that they’re in compliance with the new rules that have been governed. Tax advisors will be able to communicate the complex need for the confirmation of all business meals, including who attended the meal and a description of the type of business that was conducted. Tax advisors will be able to explain the importance of creating new accounts that allow business owners to track their entertainment expenses (non-deductible), meals that qualify as 100% deductible and meals that have been limited to 50% deductible. By creating a separate account and keeping track of entertainment expenses throughout the year, business owners and tax advisors will be able to easily and efficiently determine which expenses to deduct during tax season.
By Paige Knight
